28 Oct 28th October 2024
Weekly Index Movement
S&P500 | -1.0% |
Nasdaq | +0.1% |
Aussie All Ords | -1.0% |
Markets were weak last week as rising 10-year Treasury yields pressured stock prices.
The stock market’s six-week streak of gains was interrupted last week, as rising bond yields started to attract investors’ attention. Just over a month has passed since the Fed kicked off a new easing cycle, cutting its policy rate by a larger-than-typical half a percentage point. Yet, during that time, both 2- and 10-year Treasury yields have climbed, challenging the prevailing narrative. Could the rally in rates pose a serious threat to the stock market’s momentum?

10-year yields were 3.63% on September 16th, crossed 4.0% on October 7th and are 4.28% now. The Fed cut rates by 50 basis points on September 18th and despite this cut, rates have risen. Put another way, 10-year yields are up 65bps since the Fed decided to reduce short term rates by 50bps.
Last year rising rates led to short-term dips in the market which is why this event is seen as a potential risk.
Some are saying it is due to the expected budget deficit, but I don’t buy that. All that is happening is bond market is adjusting to the fact that interest rates will remain higher for longer. For some time now I have been saying the market is getting ahead of itself with expectations of continued cuts in the overnight rate. That isn’t going to happen as the economy, and in particular the labour market, is too strong.
Despite these rising yields, earnings announcements have been sufficient to hold stock prices near all time highs. That and Elon Musk making extremely biased statements once again.
Tesla (TSLA) reported Q3 numbers after the close on Wednesday, and caused shares to jump 21.9% on its earnings reaction day Thursday. Earnings came in at 72cents vs 60cents expected but revenues were in-line. When you dive deeper into the numbers you can see it wasn’t vehicle sales that drove the extra profits, but rather they came from EV-sales credits the company sold to other car makers.
What really drove the stock gains was Elon saying he expects vehicle sales to be 15%-20% higher next year. I don’t know why anyone reacts to what he says. Back in 2018 the SEC made him step aside as Chairman for three years and pay a $20million fine for making false statements. He’s back to doing it again and this time it added $33.5billion to his net wealth over night.
Surely he says these things because they are true, right? Can’t be anything to do with making $33.5billion from it?
Stock markets often do not make sense and the actions of Mush fanboys make even less sense. Still, it was a nice day for those of you holding Tesla stock.
US Election
The US election will be held next Tuesday, and the outcome is as close to 50:50 as I have ever seen.
In recent days there has been a leaning in betting markets towards Trump. Activity in his Trump Media stock would also indicate traders are betting he wins
If Trump wins and is able to push his policies through Congress (and that is the crucial thing here) then income taxes will be cut and tariffs will be posted on foreign goods. If Kamala wins then government spending and budget deficits will rise.
Both are inflationary as both will expand the economy. Which is why the stock market is not concerned about who wins. And neither should you be.
As, the truth of the matter is, unless one side gets a clean sweep of both the House and Congress nothing much will change. And a clean sweep is unlikely, so forget about the election. It won’t stop the bull market.
Fear Sells
I had a conversation with an investor this week that went something along the lines of “……because of something I don’t understand but sounds scary the stock market is going to have a huge crash”
I’ve been having these same kind of conversations with people since I got into the industry in 2008. That move was good timing for me. Right in the middle of the GFC where every conversation I had was about stocks dropping.
I don’t know what it is, but some investors just seem to think after rising stock prices for 150 years it is all going to suddenly end next week. Usually for some weird reason like “because the debt is too high”
When I ask, what about government debt levels will cause a crash? I am usually told, “because it will.”
Ah. Now I understand. The answer is so obvious no one needs to really explain it.
The problem is, ever since 2008 I don’t think I have ever seen a crash come about as predicated.
Rather – never once have I had an conversation with someone who said “there is going to be a massive stock market rally”
The S&P500 is up 62% since just October 2022. 2 years and over 60% gains. That’s fantastic.
Stock investing really is an optimist’s game. Pessimists never make money and spend their whole time waiting for the crash that never comes.
So rather than fearing a crash is coming, you should fear not being invested even more.
Which brings me to Goldman Sachs.
Goldman Sachs is Wrong
A recent Goldman Sachs report forecasting that the S&P 500 will compound at just 3 percent annually over the next 10 years is getting a lot of buzz, so let’s talk about that.
Goldman’s view comes from CAPE valuations and because they think the S&P500 is overly reliant on a handful of Tech names.
CAPE valuations are based on Robert Schillers work and his CAPE valuation index. It currently sits at 37, which is admittedly very high for this index. But this work is based on long-run historical valuations of the US index.
The problem in using this is, the index is comprised of very different companies to what it has been in the long run. In fact, the index is always changing to what is most profitable at the time (one of the arguments for index investing)
As for the idea of reliance on a small set of Tech companies…..the top 8 tech names are a third of the S&P500 index
All of these names are global leaders in their respective technologies. If you believe Goldman’s forecast what you are saying is, “I don’t believe these global leaders with almost perfect records of increasing earnings, that are at the forefront of AI development, can generate more than 3% growth per year”
The spirit of human innovation is always the key driver of long run equity returns. Nowhere is that spirit more on display than these Tech names. If some business does come along to eventually threaten their preeminence, then that business will replace them in the index and drive future returns. Stock market returns are very much like human evolution with the stronger races replacing the weaker and driving continuous improvements.
OpenAI and SpaceX will almost certainly go public in the next 10 years and could end up high up on this list, replacing weaker names but ensuring growth north of 3%.
Finally, let’s look at history. Here are rolling 10-year returns.
I have marked the Goldman 3% level, as well as the average at 10.6%
You will note only 4 times that 10-year returns have been 3% or lower. Each of them only happened because something very, very bad occurred. Without a similar, very, very bad event happening soon, it is very hard to see how stocks only compound at 3% over the next decade.
This Week
In the week ahead, an update on the Federal Reserve’s preferred inflation gauge, the October jobs report, and earnings from Big Tech stalwarts Alphabet (GOOGL,GOOG), Apple (AAPL), Amazon (AMZN), Microsoft (MSFT), and Meta (META) will drive the direction of markets to kick off November.
Updates on third quarter economic growth, job openings, service and manufacturing sector activity, and consumer confidence are also on the calendar.
A busy week of corporate earnings awaits, with 169 members of the S&P 500 expected to report quarterly results. Ford (FORD), AMD (AMD), McDonald’s (MCD), Eli Lilly (LLY), and Exxon (XOM) will be among the companies highlighting the schedule.
Warning
Stock values can go down as well as up. It is possible to lose 100% of your investment in a stock. Any advice given by Capital 19 is general advice only and does not take your personal circumstances into account and might not be suitable for you.